* A few weeks ago in the Tribune…
WeWork leases more than 1 million square feet in Chicago. It is the largest office tenant in the city, a statistic that does not include companies or government agencies that own their space rather than renting. WeWork is also the largest tenant in other markets, including Manhattan, London and Washington, D.C.
The brand appeals to small businesses, start-ups and freelancers who can’t afford permanent office space. And a growing part of its customer base includes larger corporations looking for cost-efficient ways to enter new markets.
But critics say WeWork has given little indication of how it can eventually become profitable.
To put this into some perspective, downtown business district tenants leased nearly 13 million square feet of office space last year. So, WeWork represents a significant chunk of the total.
* And the last excerpted line in that Tribune story doesn’t even begin to describe WeWork’s problems…
But perhaps what made WeWork different is the apparent problems with the company’s business model. It was on the hook for $47 billion in future lease payments to building owners while having committed revenue of only $4 billion. Last year’s loss jumped to $1.9 billion on revenue of $1.8 billion — for every dollar it made, it was spending two. For the first half of this year, losses climbed to $904 million even as revenue doubled to $1.54 billion.
Whew.
By the end of last month, WeWork’s parent company “We” had withdrawn its initial public offering.
* Lots of self-dealing at that company…
Jamie Dimon’s bank, along with UBS and Credit Suisse, helped [co-founder Adam Neumann] with a $500 million personal line of credit that allowed him to buy buildings that he then leased back to WeWork.
Neumann took out more than $700 million before the IPO was filed.
* Neumann was also enabled by other New York giants…
WeWork was forced to pull its IPO—despite bankers at Goldman pitching valuations as high as $90 billion—after investors began studying its high debt levels, massive losses and that it burned through mountains of cash, issues that were glossed over by the company’s marketing pitches and Neumann’s savvy promotion.
A truly insane $90 billion market cap estimate and just weeks later the company is scrambling everywhere to find cash to avoid burning through the rest of its borrowed and invested money by the end of the first quarter. Sheesh.
* But let’s get back to what matters on this blog: Illinois…
What happens to the New York and Chicago commercial-real-estate markets where WeWork was the biggest and the second-biggest tenants?
Good question. Its departure would definitely be disruptive, but could its formerly leased space be absorbed? We could be about to find out…
In a potential bankruptcy, WeWork’s $47 billion in lease obligations could be frozen, and commercial real estate in cities where WeWork is very active – like New York and London – could be paralyzed, deflating one of the strongest markets since the financial crisis.
Could it pop the city’s commercial real estate bubble?…
“All of these things help a company like ours,” [Nick Clark, founder of Dallas-based coworking firm Common Desk] said. “There was never a coworking bubble, but we’re about to see a big WeWork bubble pop.”
* And now on to New York Magazine…
Essentially what happened is that the employees of We who didn’t get a chance to sell, SoftBank, and some other institutional investors have lost $47 billion. Had this consensual hallucination gone on for 60 more days, retail investors would have experienced that loss. So this is a good thing! This is the [regulated public] markets working. Whereas Uber, the consensual hallucination continues. They have to maintain the illusion of growth. They have to maintain the growth story. Without the growth story, they’re worth 20 percent of what they’re worth now. I think that chops off 50 to 80 percent in the next 25 months. WeWork can start from zero. If they act crisply enough, it can still be a nice, cute office-sharing company. Uber has to maintain the hallucination. Uber has to keep chasing that eight ball.
* And with that bit about Uber needing to maintain the appearance of growth in mind…
* Uber Is Dreaming Big About Its Old Post Office Space: The roof is big enough to accommodate George Jetson-style aircraft being developed by Uber Elevate, the company’s air transportation arm.
* Uber launches staffing business in Chicago: Uber Works will be led by Andrey Liscovich. He declined to specify how many employees the unit will have but said, “We plan to grow rapidly.”
* Uber and Lyft close at record lows as investor skepticism grows around recent IPOs: Uber, which had a private valuation of $76 billion ahead of its IPO in May, has seen its valuation drop steeply as its stock price has dwindled. The company now has a market cap of roughly $49 billion.
* A wake-up call for the venture-capital-Silicon-Valley industrial complex: Groupon, for example, has erased $14.5 billion in market capitalization since going public in 2011.
- Not a Billionaire - Friday, Oct 4, 19 @ 9:20 am:
Wow an outfit like this holds that much in leases in this so called booming economy.
- Steve - Friday, Oct 4, 19 @ 9:22 am:
No one can deny this could be a major, major problem. The good news is , Chicago has been quite good at attracting high tech jobs downtown.
- Occasional Quipper - Friday, Oct 4, 19 @ 9:29 am:
Is this something like “we lose money on every transaction, but we make up for it in volume.”?
- Rich Miller - Friday, Oct 4, 19 @ 9:30 am:
===Is this something like===
Yes.
- City Zen - Friday, Oct 4, 19 @ 9:40 am:
WePonzi or WeBezzle?
- anonomoose - Friday, Oct 4, 19 @ 9:53 am:
I had never before heard the phrase “consensual hallucination” and boy it is apt. Plus it’s a good band name.
- Responsa - Friday, Oct 4, 19 @ 10:07 am:
This is a very important and vastly under-reported story. Thank you for the thorough post, Rich.
- DuPage Saint - Friday, Oct 4, 19 @ 10:18 am:
I hope that this time when all the bubbles burst there are no bailouts and more than a few bankers and investment bankers are thrown in jail
- James the Intolerant - Friday, Oct 4, 19 @ 10:18 am:
Gotta love that New York Magazine.
Oh, my daughter works there
- Michelle Flaherty - Friday, Oct 4, 19 @ 10:22 am:
Michael Scott Paper Company
- @misterjayem - Friday, Oct 4, 19 @ 10:28 am:
Sure seems like the perfect time for Sterling Bay/Lincoln Yards to add 14.5 million square feet of property to Chicago’s commercial real estate market.
Fortunately, they’ll have $1.3 billion in TIF financing, i.e. Chicago property tax money, to help them through any rough patches.
– MrJM
- Annonin' - Friday, Oct 4, 19 @ 10:32 am:
The unraveling of WeWork has been inching into the news for about a month. Seems to start with reports that NYC building owners had stopped leasing space to it. The new idea was to develop a small tenant lease plan. Lots of razzle dazzle.
Reminds us the dot.com bust 20 years ago
- cover - Friday, Oct 4, 19 @ 10:48 am:
Why has economic “growth” in recent years been so tied in to these various bubbles? It makes you wonder if the economy is as healthy as the topline numbers make it appear - especially when a major real-life economic indicator, the fertility rate, continues to decline.
- DuPage - Friday, Oct 4, 19 @ 10:48 am:
Sounds like WeWork = Canary in the coal mine.
- Sayitaintso - Friday, Oct 4, 19 @ 11:05 am:
Name change underway -WeDon’tWork
- Moe Berg - Friday, Oct 4, 19 @ 11:09 am:
Excellent post, Rich. Great synthesis of various threads. Thank you.
- Gooner - Friday, Oct 4, 19 @ 11:10 am:
A few years ago, I was looking for office space to practice law. I had just opened my own shop and was cautious as to rent.
Regus was the big player in the shared space market, along with one other company I can’t recall.
I just did a search and found out that Regus barely exists. WeWork has the dominant share.
Sounds like WeWork grabbed market share, but did so without being profitable.
For what it is worth, I passed on Regus at the time and instead became Of Counsel (along with practicing under my own firm name) for a decent sized firm.
The problem with places like Regus is that they tried to assert the brand and that conflicted with my own.
I didn’t want to meet with clients in a conference room that had Regus signs.
- Paddyrollingstone - Friday, Oct 4, 19 @ 11:25 am:
Great article, Rich. I never could figure out how a company that is essentially a middleman could have a “value” of $90 billion. Then again, I’m not some high falutin’ investment banker.
- Dotnonymous - Friday, Oct 4, 19 @ 1:09 pm:
for every dollar it made, it was spending two…ZudZwang.
- Suburbanon - Friday, Oct 4, 19 @ 1:20 pm:
MrJM - your comment about $1.3 Billion in TIF money helping SB Lincoln Yards through rough patches is another example of consensual hallucination. That money doesn’t go to operations but rather is earmarked for eligible improvements, most of which are parks, roads, bridges, infrastructure, etc., not subsidies for leases. We can argue over whether those infrastructure improvements should be subsidized but don’t think it will help SB through any rough patches.
- NorthsideNoMore - Friday, Oct 4, 19 @ 1:26 pm:
This here is real money (or smoke and mirrors money)Are all the construction cranes in the Loop being taken down after this? Yikes.
- Dotnonymous - Friday, Oct 4, 19 @ 1:30 pm:
Zug…zwang…makes a little more sense spelled correctly…oops.
- Dotnonymous - Friday, Oct 4, 19 @ 1:31 pm:
This is gonna’ leave a mark.
- @misterjayem - Friday, Oct 4, 19 @ 2:03 pm:
“That money doesn’t go to operations”
And if I gave you $10,000 that you could only use for home improvements, that wouldn’t free-up some of your money for a nice vacation?
Money’s fungible.
– MrJM
- Cook County Commoner - Friday, Oct 4, 19 @ 2:11 pm:
I’ll go with Larry Ellison, founder of Oracle, who reportedly called both Uber and WeWork worthless. In reference to both, he reportedly said they rely on their value with “an app my could have written.”
- Cook County Commoner - Friday, Oct 4, 19 @ 2:13 pm:
Sorry. Quote should be “an app my cat could have written.”
- revvedup - Friday, Oct 4, 19 @ 3:44 pm:
A massive fraud from beginning to end, especially the part about buying a building, selling it to yourself, them leasing it back to yourself (or whatever), all while taking tax breaks. Hello, FBI? Securities and Exchange Commission? Ghostbusters??
- Wordpolice - Friday, Oct 4, 19 @ 4:09 pm:
Revvedup - wow, that’s a good example of word salad. You can’t just throw terms out there alleging fraud if you obviously have zero idea of what any of them mean (or whatever). No offense, but this is a serious and complex issue, and your post trivializes real estate investment and the public policy that makes revitalization of these areas attractive. Sometimes it works and sometimes it doesn’t, but don’t allege “fraud” like you’re writing a junior high paper with no evidence. Just sayin’.